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BENEDICT AND OTHERSvMONETARY BOARD OF THECENTRAL BANK OF SRI LANKAAND OTHERS(PRAMUKA BANK CASE)
COURT OF APPEALSRIPAVAN, J.
CA NO.77/2003MARCH 20, 27, 2003APRIL 3, 2003MAY 19, 20, 22, 2003JUNE 9, 2003
Monetary Law (Amended) S.32 of 2002 – S.8.(2) C- S.9-S.17 – BankingAmendment Act 33 of 1995 – Cancellation of Licence of a Bank – Validity -Exercise of Discretion – Review of Same by Court – The exercise of discre-tionary powers -Should reasons be given – Was the Monetary Board proper-ly constituted? – Interpretation Ordinance S.6(3)b – Vested rights.
The petitioners are the depositors of the 5th respondent Pramuka Bank. Thepetitioners alleged that, the 4th respondent (Director of Bank Supervision) ini-tiated an examination into the affairs of the Bank. An Order was issued direct-ing the Bank to cease the unsound and improper financial practice of recover-ing interest after the balance sheet date and showing this as income.Thereafter it was alleged that the 4th respondent carried out a second statu-tory examination into the activities of the Bank. The Report was sent to the 1strespondent, who directed the Bank to freeze the deposits and the advancesand listed the Bank as a licensed deposit taking institution.
Thereafter several meetings took place between the Senior Management ofthe Bank and the officials of the Central Bank. The proposals considered bythe bank were considered and rejected by the 1st respondent. Thereafter the4th respondent submitted a Report to the 2nd respondent (Governor of theCentral Bank) that she was satisfied that the current financial conditions of theBank was critical, and the 1st respondent thereafter directed the Bank to sus-pend its business forthwith. In terms of section 761, the 4th respondent sub-mitted a Report to the 1st respondent on the post supervision examination ofthe Bank setting out the several options available in terms of section 76Nwhich would enable the 1st respondent to permit the bank to resume business.
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The petitioners alleged that the 1st respondent did not consider any of theoptions, and that the several options, received the attention of the 1 st respon-dent and that no reasons were given as to why the 1st respondent rejected theoptions suggested by the 4th respondent even if they were considered, beforethe cancellation of the Banks Licence.
The petitioners also contend that the Monetary Board was not properly consti-tuted when it made the impugned order. One member was appointed by thePresident for a period of 6 years and he had ceased to be a member in termsof the Amending Act, and had to be re-appointed by the President on the rec-ommendation of the Minister of Finance with the, concurrence of theConstitutional Council.
Held :
The court does not dispute that the 1st respondent has a discretion in thematter. It is the 1st respondent alone who can take such a decision pro-vided the 1 st respondent acts fairly and reasonably within the four comersof its lawful jurisdiction. The court however can examine the exercise ofthe discretionary power in order to see whether it has been used proper-ly, fairly and according to the rules of reason and justice.
There is nothing to show that, the several options contained in the 4threspondent's report received the attention of the 1st respondent and adecision was taken to reject all of them. The petitioners were led to believethat the 1st respondent arrived at a decision to cancel the licence and towind up its affairs after considering the Report of the 4th respondent.
No reasons were given as to why the 1 st respondent rejected the optionssuggested by the 4th respondent.
In the absence of reasons, it is impossible to determine whether or not the1st respondent in fact considered the four options.
Failure to give adequate reasons amounts to a denial of justice and is itselfan error of law. The reasons must not only be intelligible but should dealwith the substantial points which have been raised.
In the absence of reasons the person affected may be unable to seewhether there has been a justiciable flaw in the decision making process.
If reasons are not given the Court can only draw an inference that the 1strespondent had no rational reasons for its decision and has failed to actwith procedural fairness towards the depositors and creditors.
Section 6(3) (b) of the Interpretation Ordinance, protects the vested rightsacquired under the repealed Act, in the absence of any compelling lan-guage within the four comers of the repealing Act to a deliberate decisionon the part of Parliament to impair those rights, the Monetary Board wastherefore properly constituted.
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An APPLICATION for a Writ of Certiorari and Mandamus.
Cases referred to :
Secretary of State for Education v Tameside Metropolitan B. C. 1977 AC1064
Associated Provincial Picture Houses Ltd., v Wednesbury Corporation1948 1KB 223 at 229.
Premachandra v Jayawickrema – 1994 2 SRI LR 90 at 101 (SC)
R v Secretary of State for the Environment ex.p. Nottinghamshire -1986 AC 204 at 249
Premachandra v Jayawickrema – 1993 2 SRI LR 294 at 314
Re Poyser and Mills, Arbitration – 1964 2 QB 467.
Suranganie Marapana v Bank of Ceylon – 1997 3 SRI LR 156 at 168
Sirisena and others v Kobbekaduwa, Minister of Agriculture and Lands80 NLR (Vol. 1) 1 at 172
Free Lanka Insurance Company Ltd., v Ranasinghe – 65 NLR 486
Hai Bai v Perera – 55 NLR 443M.A.Sumanthiran for petitioners.
Saleem Marsoof, P.C. Addl. Solicitor-General with Nihal Jayawardena S.S.C..and Arjuna Obeysekera S.C., for 1st Respondent.
K. Kanag Isvaran P.C., with Ms. D.Wijawardena for 2-4th Respondents.
Cur. adv. vult
July 02, 2003SRIPAVAN,J.
The petitioners claim that they are the depositors of the fifth 01respondent bank which commenced business as a licensed spe-cialised bank (hereinafter referred to as the “bank”) on or around21st July 1997. Accordingly, the provisions contained in PART IXAof the Banking (Amendment) Act No.33 of 1995 apply to this bank.
The petitioners allege that on or about July 1999 the fourth respon-dent initiated an examination into the affairs of the bank as provid-ed in terms of Sec.76L of the said Act. The second respondent inhis affidavit dated 10th February 2003 states that the following mat-ters came to light during the course of the statutory examination 10held in 1999/2000 by the fourth respondent:-
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That the bank was engaged in an unsound and improperfinancial practice whereby interest recovered by granting freshloans to convert non-performing loans into performing loansafter the balance sheet date had been wrongfully accountedas income for the bank.
That the bank had fictitiously inflated its profit for the account-
ing year 1999 and thereby showed a profit of Rs.8.3 millionwhen in fact the bank has suffered a loss of Rs.16.5 million forthat year.20
The bank had been able to avoid making the required provi-sioning and thereby violated the directions issued by theCentral Bank on this matter.
Accordingly, the first respondent after considering the reportsubmitted by the fourth respondent formed an opinion that the bankwas engaged in certain irregular transactions so as to distort thetrue financial condition of the bank, directed the fourth respondentto issue a direction in terms of Sec. 76K of the said Act. Thus, thefourth respondent issued an order on the bank on 9th December1999 (1R8) directing it to cease the unsound and improper financial 30practice of recovering interest after the balance sheet date andshowing them as income for the bank.
It appears that the fourth respondent carried out a secondstatutory examination into the activities of the bank as at 30thSeptember 2001. The affidavit of the second respondent showsthat the following matters revealed at the said examination.
That the bank had continued with the imprudent activitieshighlighted in the previous examination by resorting to differ-ent irregular and complex practices and thereby circumventing
the directions given by the first respondent.40
The bank had resorted to other unusual and questionabletransactions and violated several prudential requirements.
That the financial condition of the bank was further deteriorat-ing.
That several provisions of the Banking Act had been violated.
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The report containing the findings of the fourth respondentwas sent to the first respondent, who having considered the saidreport directed the bank to freeze the deposits from the public andthe advances as at 12th July 2002. The Counsel for the petitionersubmitted that having issued the said direction, the first respondentlisted the bank as a licensed deposit taking institution by an adver-tisement published in the Ceylon Daily News dated 12thSeptember 2002 marked P7. It is to be noted that the said adver-tisement provided, interalia, as follows – “On the other hand, thefinancial institutions registered and recognised by the Central Bankof Sri Lanka are supervised and regulated by the Central Bank ofSri Lanka. The fact that they are supervised does not mean thatyour money is guaranteed by the Central Bank of Sri Lanka. Bysupervision and regulation, the Central Bank of Sri Lanka attemptsto ensure that the financial institution acts in a prudential manner,without exposing the deposits of the public to undue risk”.
Several meetings were held on 25th March 2002, 2nd May2002, 21 st June 2002 and 3rd July 2002 between the officials of theSenior Management of the bank and the officials of the CentralBank with regard to matters concerning the financial stability andthe ongoing viability of the bank. Consequent to the said discus-sions, the bank was requested to submit a re-structuring proposalto the first respondent. The said proposals submitted by the bankdated 17th July 2002 and 26th July 2002 marked IR16 and IR17respectively were considered and rejected by the first respondentas the same were not found to be feasible. On two occasions,namely, 6th August 2002 and 4th October 2002 the fourth respon-dent observed that the deposit level of the bank had been in excessof the limit and called for explanation from the bank while caution-ing that any promotional campaign with a view to attract funds fromthe public could be detrimental to the interests of the depositorsand creditors. The said report had an annexure (A16) explainingthe critical condition of the bank, to be submitted to the first respon-dent. The report further indicated that the fourth respondent afterexamining the matters would make a recommendation to the firstrespondent. On 21st October 2002 the fourth respondent submitteda report (A17) to the second respondent in terms of Sec.76 M(1)informing that she was satisfied that the current financial condition
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of the bank was critical and moved that timely action be taken toprevent the interests of the depositors and creditors of the bankbeing further jeopardized.
The first respondent having considered the imminent liquiditycrisis faced by the bank on 25th October 2002 made order (A18(a))directing the bank to suspend its business forthwith. It is relevant tomention that the petitioners are not challenging this order made by 90the first respondent suspending the business of the bank.
In terms of Sec.76M(3) of the Act, once a suspension order ismade by the first respondent, it ceases to have effect upon theexpiration of a period of sixty days from the date on which such anorder is made. Thus, the learned Addl S.G submitted that beforethe expiration of the sixty days from 25th October 2002, the firstrespondent had the following two options.
To make an order permitting the bank to resume business
either unconditionally or subject to such conditions as the firstrespondent may consider; or100
To cancel the licence issued to the bank and to direct theBoard of Directors of the bank to apply for winding up.
On 21st November 2002, the fourth respondent submitted areport to the first respondent on the post-suspension examinationof the bank, setting out the several options available in terms ofSec. 76 N which would enable the first respondent to permit thebank to resume business. It may be relevant to reproduce certainparagraphs from the said report marked A19.
“13.2 Liquidation of the bank should be resorted to only if all other
options to revive the bank fail for the following reasons:-no
Firstly, from the depositors point of view, liquidation willhave serious repercussions on the existing depositorswho are likely to suffer losses given the extent to whichthe assets of PSDB have been impaired and the parlousstate of the financial health of PSDB. Based on the fairvalue of assets arrived at, the depositors and creditorsstand to lose heavily and may receive only a part of theirdeposits viz.46%.
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Secondly, liquidation could have adverse implications onother financial institutions and could precipitate a crisis in 120the financial system. This is already evident from the factthat certain small banks are not in a position to complywith the minimum statutory liquidity requirement as aresult of a decline in deposits after the suspension.
Thirdly, a complete liquidation procedure would be pro-tracted and would take at least five years and depositorsmay receive even less than the current estimates suggest.Moreover, in a liquidation scenario, even the recovery ofperforming advances would eventually become difficultwhich would result in even lesser amounts being available 130for the depositors.
Finally, the Central Bank would be exposed to consider-able criticism if any policy action to deal with the currentcrisis would have a contagion effect, especially in respectof the smaller institution.
In view of the foregoing difficulties, the next option that may beconsidered is whether the Monetary Board could permit resumptionof business conditionally and simultaneously take steps that arepermitted in terms of Sec.76N of the Banking Act.sec 76N (copyannexed) provides for the Board to do one of the following, in rela- 140tion to PSDB if the bank is permitted to resume business in termsof Sec.76M(3) (a)
Make arrangements to amalgamate PSDB with anotherinstitution which consents to it.
Arrange to bring in fresh capital and shareholders to thebank, and re-constitute the Board of Directors.
Re-construct PSDB in any manner as would serve the
interest of depositors. This includes the closing down ofunviable sections of business and re-organizing the man-agement.150
Direct one or more shareholders of PSDB to transfer own-ership of their shares to persons nominated by theMonetary board on payment of compensation based onmarket value in case of quoted shares, or a price deter-
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mined by a valuer nominated by the Board in the case ofun-quoted shares.
Thus, there are several options available to the Board, if the
Board takes a decision in terms of Sec.76 M(3) (a) to permit theresumption of the business subject to conditions
Taking into account all the circumstances relating to this mat-ter, it would seem that of the options provided for in Sec.76 N, themost preferable course of action is for the Monetary Board torequire the present shareholders in terms of option (d) to transfertheir shares to another bank or banks that consent to the arrange-ment.
Option (d) has the advantage of enabling the removal of pre-
sent Directors who have been responsible for the mismanagementand misdeeds of PSDB
In the event action cannot be taken in terms of Sec.76N, theonly available option would be to cancel PSDB's licence anddirect liquidation in terms of Sec.76 M(3) (a) despite the difficultiesand resistance that may be encountered.”
This court does not dispute that the first respondent has a dis-cretion in the matter. However, it is a discretion that has to be exer-cised reasonably, fairly and justly. As Lord Diplock said “the admin-istrative discretion involves a right to choose between more thanone possible course of action upon which there is room for rea-sonable people to hold differing opinions as to which is to be pre-ferred.” – Secretary of State for Education v TamesideMetropolitan B.C<1). The valid exercise of a discretion requires agenuine application of the mind and a conscious choice by the firstrespondent. The effect of the Monetary Law Act is not to set up thecourt as an arbiter of the correctness of one view over the other. Itis the first respondent alone who can take such a decision and,provided the first respondent acts fairly and reasonably within thefour corners of its lawful jurisdiction, this court in my opinion can-not interfere. Accordingly, it follows, that the court can examine theexercise of the discretionary power in order to see whether it hasbeen used properly, fairly and according to the rules of reason andjustice.
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Thus, one has to consider whether the first respondent did infact take any positive step to amalgamate the bank with anotherinstitution and / or make arrangements to bring in fresh capital and/ or consider re-constituting the Board of Directors and / or closingdown unviable sections of business and re-organizing the man-agement and / or transferring the ownership of shares to personsnominated by the first respondent as suggested by the fourthrespondent in clause 13.3. There can be no legal objection to thefirst respondent obtaining advice and consulting suitable personsbut it is vital that it should analyse the options available and come 200to a correct decision in the public interest. It is the duty of court tostrike a suitable balance between executive / administrative effi-ciency and legal protection of the citizen. Judicial review means,review of the manner in which the decision was made. Lord Green,
MR expounded this theory in Associated Provincial Picture HousesLtd v Wednesbury Corporation Pi as follows – “It is true that discre-tion must be exercised reasonably. Now what does that mean?Lawyers familiar with the phraseology used in relation to exerciseof statutory discretions often use the word “unreasonable” in arather comprehensive sense. It has frequently been used and is 210frequently used as a general description of the things that must bedone. For instance, a person entrusted with a discretion must, so tospeak, direct himself properly in law. He must call his own atten-tion to the matters which he is bound to consider. He mustexclude from his consideration matters which are irrelevant to whathe has to consider. If he does not obey those rules, he may truly besaid, and often is said, to be acting unreasonably. ”
“There is no absolute and unfettered discretions in public law;discretions are conferred on public functionaries in trust for the pub-lic, to be used for the public good, and the propriety of the exercise 220of such discretions is to be judged by reference to the purposes forwhich they were so entrusted.” – G.P.S. De Silva C.J. inPremachandra v JayawickramaS3!
Lord Wrenbury dealing with this argument in R v Secretary ofState for the Environment ex.p Nottinghamshire laid down thelaw as follows – “ A person in whom is vested discretion must exer-cise his discretion upon reasonable grounds. A discretion does notempower a man to do what he likes merely because he is mindedto do so – he must in the exercise of his discretion do not what he
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likes but what he ought. In other words, he must, by the use of hisreason, ascertain and follow the course which reason directs. Hemust act reasonably. ”
If people who have to exercise a public duty by exercising theirdiscretion fail to take into matters which the fourth respondent con-siders to be proper for the exercise of their discretion, then in theeye of the law they have not exercised their discretion. “The reviewof decisions made in the exercise of statutory power, on the basisof reasonableness, taking into consideration proper matters, theexclusion of irrelevant matters and acting on evidence, being basictenets of Administrative Law, would be rendered illusory, if theauthority vested with power is permitted to take refuge in confiden-tiality and secrecy as to the true basis of his decision." -(Premachandra v Jayawickramapi■ No substantial evidence hasbeen placed before court to establish that the first respondent con-sidered any of the options. The decision of the first respondentdated 21st November 2002 (1R36) only states that the Board con-sidered the report A19 and discussed the options currently avail-able and directed the Central Bank to update the information on itsfindings and to consult a lawyer experienced in corporate mattersand report further to the first respondent. It only appears that thefirst respondent invited the members of the Board of Directors ofthe Bank and gave them an opportunity on 13th December 2002(1R37) to respond to the findings of the examination conducted bythe Central Bank. The response of the Board of Directors was thatthey did not have a proposal for reviving the bank. How can thefirst respondent expect any plans/ proposals from the same Boardof Directors when the suggestion by the fourth respondent was tore-constitute the Board? As submitted by the learned Counsel forthe petitioners, there is not an iota of suggestion in 1 R36 that theseveral options contained in clause 13.3 received the attention ofthe first respondent and a decision was taken to reject all of them.The petitioners had been led to believe that the first respondentarrived at a decision to cancel the licence of the bank and to windup its affairs after considering the report A19 submitted by thefourth respondent. No reasons whatsoever were given as to whythe first respondent rejected the options suggested by the fourthrespondent even if they were considered. In the absence of rea-
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sons, it is impossible to determine whether or not the first respon-dent in fact considered the four options given in clause 13.3. Failureto give adequate reasons therefore amounts to a denial of justice 270and is itself an error of law. The reasons must not only be intelligi-ble but should deal with the substantial points which have beenraised. The courts have treated inadequacy of reasons as an erroron the face of record so that inadequately reasoned decision couldbe quashed, even if the duty to give reasons was not mandatory.
[Vide Re Poyser and Mills' Arbitration.]^ In the absence of rea-sons, the person affected may be unable to see whether there hasbeen a justiciable flaw in the decision making process “If reasonsare not disclosed the inference may have to be drawn that it isbecause in fact there were no reasons – and so also, if reasons are 280suggested, they were in fact not the reasons which actually influ-enced the decision in the first place.” – Wijetunga, J in SuranganieMarapana v Bank of Ceylod7 Giving reasons introduces clarityand minimises arbitrariness; it give satisfaction to the party againstwhom the order is made and also enables the supervisory court tokeep any tribunal within bounds. If the reasons are not given, thecourt can only draw an inference that the first respondent had norational reason for its decision and has failed to act with procedur-al fairness towards the depositors and creditors.
As Sharvananda J ( as he then was) observed in Sirisena and 290others v Kobbekaduwa, Minister of Agriculture and Lands – “It isof the utmost importance to uphold the right and indeed the duty ofthe courts to ensure that powers shall not be exercised unlawfullywhich have been conferred on a local authority or the executive, orindeed anyone else, when the exercise of such powers affect thebasic rights of an individual. The courts should be alert to see thatsuch powers conferred by statute are not exceeded or abused. ”
Learned Counsel for the petitioner also urged that theMonetary Board was not properly constituted when it made theimpugned order, sought to be quashed in these proceedings. It is 300common ground that the Monetary Law (Amendment) Act No.32 of2002 was certified by the Speaker on 17th December 2002. Sec.3of the amending Act No.32 of 2002 repealed Sec.8(2)(c) of theMonetary Law Act as follows:-
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three members appointed by the President on the rec-ommendation of the Minister of Finance, with the con-currence of the Constitutional Council.
Sec.9 of the amending Act amended Sec.17 and increasedthe membership of the Monetary Board from three to five and thequorum.of the members was made three. It was not in dispute thatMr.Chanmugam was appointed as a member of the MonetaryBoard by the President for a period of six years commencing from17th July 2001. The contention of the learned Counsel for the peti-tioner was that Mr.Chanmugam ceased to be a member of the saidBoard in terms of the amending Act and has to be re-appointed bythe President on the recommendation of the Minister of Financewith the concurrence of the Constitutional Council.
Mr. Marsooof, A.S.G relied on Sec.6 (3) (b) of theInterpretation Ordinance and argued that Mr.Chanmugam acquireda vested right to function as a member of the Monetary Board.Sec.6(3)(b) of the Interpretation Ordinance reads thus:-
“Whenever any written law repeals either in whole or part aformer written law, such repeal shall not, in the absence of anyexpress provision to that effect, affect or be deemed to haveaffected.
the past operation of or any thing duly done or sufferedunder the repealed written law;
any offence committed, any right, liberty or penaltyacquired or incurred under the repealed written law;
any action, proceeding or thing pending or incompletedwhen the repealing written law comes into operation, but everysuch action, proceeding, or thing may be carried on and com-pleted as if there had been no such repeal. ”
I agree with the learned A.S.G. that Sec. 6 (3) (b) of theInterpretation Ordinance protects the vested right acquired underthe repealed Act, in the absence of any compelling language with-in the four corners of the repealing Act to a deliberate decision onthe part of Parliament to impair those rights. Vide, Free LankaInsurance Company Ltd v Ranasinghe^, Hai Baiv Perera J10) Interms of Sec 17 (3) of the Monetary Law Act as amended by Sec.9
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of Act No. 32 of 2002 the two ex-officio members andMr.Chanmugam participated at the Board meeting held on 17thDecember 2002 at 2.00 p.m. and took a decision to wind up thebank and cancel its licence. I hold that the Monetary Board wasproperly constituted as the amending Act did not purport to abolishthe already existing Board and to re-constitute a new Board.
For the reasons stated, a writ of certiorari is issued quashingthe cancellation of the bank's licence by the first respondent con-tained in the letter dated 18th December 2002 marked A21. A man-date in the nature of writ of mandamus is issued on the first respon- 350dent to consider the several options recommended by the fourthrespondent in A19 and thereafter to take such appropriate steps asare provided by law. I make no order as to costs. As agreed by allCounsel, the decision in this application will bind the respective par-ties in C.A.AppI 65/2003;C.A.Appl 78/2003 and C.A.appI 83/2003.
Application allowed
Writ of Certiorari issued quashing the cancellation of the Bank’sLicence.
Writ of Mandamus issued to consider the several options.
